Chapter 10: Outsourced services

Agencies’ outsourcing during 2002–03

Last year’s State of the Service report reviewed agency progress with outsourcing for the period 1 January 2001 to 30 June 2002. This period extended beyond the standard financial year reporting period and was adopted to correspond with the period following the Humphry Review.

This year the reporting period reflects the standard period of 1 July 2002 to 30 June 2003. This means that it is not always possible to compare this year’s data to last year’s. In addition, this year’s agency survey questions on outsourcing in agencies were generally limited to ‘new’ outsourcing arrangements finalised during 2002–03 so as to avoid overlap between reporting periods.² The results of this year’s agency survey, therefore, provide a snapshot of agencies’ experience with outsourcing during 2002–03. At this stage it is not always possible to identify trends. The development of a longitudinal data set should, however, redress this situation in future reports. It is also worth noting that the agency survey was not limited to the outsourcing of ICT functions but also included questions on the outsourcing of human resource/workplace relations (HR/WR) functions as well as other corporate functions or services.

This year, for the first time, the report includes information on ‘insourcing’. Insourcing occurs when an agency brings a function or service that was previously contracted out back into the agency. While the extent of insourcing to date is limited, it has been identified as a possible emerging issue, particularly given the difficulties agencies reported concerning contractor performance.

Overall, 48 of the 89 agencies (or 54%) reported finalising new outsourcing contracts or contract extensions in regard to at least one aspect of a service or function during 2002–03, including in relation to ICT services, HR/WR services and other corporate services. Forty agencies reported that they did not finalise new outsourcing contracts or contract extensions during this period and one agency did not respond to the question.

In responding to the agency survey, agencies were asked to report only on outsourced and insourced services or functions worth more than $100,000 (departmental funds) or $5 million (administered funds). Agency responses identifying services or functions worth less than these amounts were disregarded for the sake of consistency. In addition, any agency response that did not provide basic data requested in the survey was disregarded.³

Outsourcing of ICT services

Twenty-six of the 89 agencies (five large, 12 medium and nine small) reported outsourcing at least one aspect of ICT services (other than strategic planning for ICT) during 2002–03. It should be noted that even though a large number of agencies did not report engaging in outsourcing of ICT services during the year, this should not be interpreted as a lack of action regarding the implementation of the ICT initiative. For example, 73 agencies reported the amount they spent on the management of ICT contracts during 2002–03⁴, demonstrating that the vast majority of agencies (82%) had some aspect of ICT services outsourced during 2002–03. This data indicates that mature outsourcing arrangements, whereby no new ICT outsourced contracts were finalised in 2002–03, are in place in over half of all agencies.

Of those agencies that reported finalising new contracts for outsourced ICT services during 2002–03, 11 indicated that they wholly outsourced ICT. The majority (15), however, indicated that they partially outsourced ICT services. The average length of ICT contracts finalised during 2002–03 was 3.3 years, although the range varied between one and 12 years.⁵ The annualised average dollar value per ICT contract for large agencies was $14.8 million. Medium agencies averaged $515,000 and small agencies averaged $378,000.

Five of the 89 agencies reported partially outsourcing some aspect of strategic planning for ICT during 2002–03. Contracts for ICT-related strategic planning ranged from six months to two years and averaged $260,000 (per annum).⁶

This year agencies were also asked to report on insourcing that occurred during the year. Four agencies indicated that they had insourced some aspect of ICT, with one indicating that it had insourced the whole of its ICT function. The main reasons for insourcing appeared to be contractor performance and contractor insolvency (see ‘Contract management’ below for further details). One agency also indicated that it insourced strategic planning for ICT.

Resources

The agency survey asked agencies to estimate the proportion of annual resources dedicated to ICT contract management in 2002–03 as a percentage of the total cost of all outsourced ICT contracts.⁷ Overall, the majority (56%) of the 73 responding agencies reported spending less than 2.5% of the total value of ICT outsourced services on managing related contracts. However, the amounts reported varied considerably. For example, five agencies reported dedicating more than 10%. This may relate in part to the cycle of agency contracts.

Consistent with findings in previous reports, small agencies tended to dedicate a larger proportion of resources on contract management compared with medium and large agencies. This reflects the lack of economies of scale present in contract management in small agencies. Figure 10.1 shows that small agencies were more likely than large agencies to have dedicated more than five per cent and less likely than medium and large agencies to have dedicated less than 2.5% to contract management.

Agencies’ evaluation of outsourced ICT services

The extent of the effectiveness of outsourcing can be difficult to determine. The APS Commission recognises that there are many benchmarks against which effectiveness can be measured. However, for simplicity’s sake agencies were asked to report the effectiveness of outsourced services or functions against four key outcomes: overall service quality, the breadth of services available, access to skills, and value for money. Agencies were also asked to report on the mechanisms they used to evaluate outsourced services during 2002–03.

Of the 41 agencies that did report having undertaken some performance evaluation of outsourced ICT services during 2002–03, the majority reported conducting a review of the service by management (68%). Other measures reported include feedback mechanisms (56%), inspection and monitoring (54%), key performance indicators (51%), audits (41%), client surveys (39%), contract clauses (39%) and complaint records (32%).

Of the 41 agencies that reported undertaking some performance evaluation of outsourced ICT services during 2002–03, the majority of agencies (23 agencies or 56%) reported that the overall quality of ICT services to end users had changed for the better, and only two agencies (or 5%) reported a change for the worse. The response against other criteria (such as value for money, access to skills, and end users’ access to a broader range of services) was not quite as positive, nor was it negative. Figure 10.2 shows that, in terms of access to skills, the breadth of services available and value for money, the vast majority of agencies reported a better outcome or no overall change for the better or worse.

ICT outsourcing beyond 2002–03

Agencies were asked to indicate the outsourcing approaches they were considering adopting during 2003–04. The approach most commonly reported was ‘complete new tender process’, with 26% of all agencies indicating that they were considering this approach. Other approaches included ‘renew contract with variations’ (24%), ‘conclude multiple smaller contracts’ (21%), ‘piggyback on other agency contracts’ (13%), ‘renew contract as is’ (10%) and ‘partner in tender process with another agency’ (10%).

Interestingly, there appears to be no correlation between agency views on present value for money and the proposed approaches to ICT outsourcing that agencies are considering adopting in 2003–04. This appears also to be the case in relation to agency views on access to skills. However, there does appear to be a relationship between service quality and agency intentions for 2003–04. Figure 10.3 shows that agencies that reported better quality ICT services were much more likely to report an intention to renew the contract as is, renew the contract with variations and/or complete a new tender process. For example, of the agencies that indicated an intention to renew their ICT contract as is, all of them reported improvements in the quality of ICT services to end users.

One possible explanation of these results is that agencies’ experience with ICT outsourcing has increased and they are now better able to assess quality of service delivery within a value for money context. This is consistent with the survey results, which appear to indicate that quality outcomes currently play a significant role in agency decision-making on future ICT outsourcing.

In terms of the estimated costs of ICT services in 2003–04, the vast majority of agencies (64 or 72% of all 89 agencies) reported an expected increase of less than 10% in comparison with costs for 2002–03. Ten agencies reported an expected increase of between 11% and 20% and eight agencies anticipate an increase of more than 20% (with three agencies anticipating an increase of greater than 40%). Two of the agencies anticipating an increase of more than 40% reported that the size of the increase reflected a significant change in direction concerning the delivery of ICT services. A further three agencies anticipate that the cost of ICT services will fall in 2003–04. There appeared to be no correlation between the size of the agency and the anticipated change in costs.

Outsourcing of Human Resource/Workplace Relations services

This year 17 of the 89 agencies reported that they had outsourced some aspect of HR/WR services during 2002–03 other than strategic planning for HR/WR (four large, six medium and seven small).

Of those agencies that reported finalising contracts for HR/WR services during 2002–03, only two reported wholly outsourcing HR/WR. The vast majority (14 agencies) indicated that they partially outsourced HR/WR services. One agency did not respond to the question.

Twenty-three HR/WR contracts finalised in 2002–03 were reported by agencies.⁸ Only three large agencies reported finalising two or more new HR/WR contracts during 2002–03. The remaining 14 agencies reported finalising one contract during this period. The average length of HR/WR contracts finalised during 2002–03 was 2.5 years. Large agencies were more likely to have slightly shorter contracts in place.

Agencies were asked to report the dollar value of HR/WR contracts finalised during 2002–03. The average annualised dollar value was around $540,000, although the range was between $23,000 and $4.5 million. The annualised average for large agencies was around $1 million. Medium agencies averaged around $290,000 and small agencies averaged around $70,000. This difference reflects the size of the services involved and, therefore, the scope of the contracts.

Two agencies reported partially outsourcing HR/WR strategic planning during 2002–03. Related contracts were generally short (around one year) and contract values varied.

Two agencies indicated that they had insourced some aspect of HR/WR, with one indicating it had insourced the whole of the HR/WR function. The main reasons for insourcing appeared to be contractor performance and contractor insolvency (see ‘Contract management’ below for further details).

Agencies’ evaluation of outsourced HR/WR services

Twenty-seven of the 89 agencies reported conducting some performance evaluation of outsourced HR/WR services during the reporting period. A further 33 agencies stated that they have not evaluated outsourced HR/WR services.

Of the 27 agencies that reported undertaking some performance evaluation of outsourced HR/WR services during 2002–03, the majority of agencies (16 agencies or 59%) reported that the overall quality of HR/WR services to end users had changed for the better. The response against other criteria was similar, although three agencies reported that value for money had changed for the worse. Overall, as Figure 10.4 shows, it appears that agencies’ experience with HR/WR outsourcing is generally more positive compared with ICT outsourcing.

Outsourcing of other corporate services during 2002–03

This year 32 of the 89 agencies reported that they had outsourced some aspect of other corporate services during 2002–03.⁹ The most frequently reported other corporate functions or services were property management (13 agencies), internal audit (13 agencies), financial management services (six agencies), legal services (five agencies) and office services (five agencies). Other functions or services reported included cleaning services, security (both vetting and guarding), records management and mail/freight services.

One agency reported that it had wholly insourced its financial management function during 2002–03. Another agency reported partially insourcing records management.

 

2 In the agency survey, agencies were asked to report on outsourcing contracts and contract extensions signed in 2002–03, whether effective in 2002–03 or after 30 June 2003.

3 This occurred, for example, when an agency answered ‘yes’ to the question ‘Did your agency outsource any ICT services during 2002–03?’ but did not provide related data on the number of contracts, contract duration, dollar value, etc.

4 Small agencies were less likely to report against this question compared with medium and large agencies (73% of small agencies compared with 92% of medium and 86% of large).

5 Please note that some agencies appear to have reported ‘bundles’ of contracts rather than every individual contract. This means that the number of contracts reported and the related contract duration and dollar value is indicative only.

6 The mean average takes into account one contract valued at $1.4 million (annualised). The median average is around $67,000 per annum.

7 Agencies were asked to include human resource costs and other administrative costs.

8 Please note that some agencies appear to have reported ‘bundles’ of contracts rather than every individual contract. This means that the number of contracts reported and the related contract duration and dollar value is indicative only.

9 In the agency survey, the term ‘other corporate’ was defined as including records management, property management, office services, legal services, library services, printing/publishing services, ministerial services, financial processing, budget management, and internal audit.